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How COVID-19 is affecting the property rental market

How COVID-19 is affecting the property rental market

Rental markets in Australia have taken a beating from COVID-19, with rents and yields falling in inner city areas, CoreLogic research showed.

Prior to the pandemic in 2019, rental markets were tightening as the levels of property investment and development had reduced, impacting rental supply, according to the firm’s head of research Eliza Owen.

But the rental market has shifted gears thanks to COVID-19. The most significant factors to the changing market are:

  • Closed international borders, pushing down rental demand from new migrants.
  • Job and income losses in sectors where workers are more likely to rent.
  • Added stock as holiday homes are converted to long-term rental accommodation due to the collapse of the travel market.

Which rental markets have been affected by COVID-19?

Suburbs in Sydney, Melbourne and Hobart have been most affected by the nosedive in rents. Out of the top 20 capital city suburbs which have seen the biggest drops, 10 were in Sydney, while Melbourne and Hobart each had five suburbs on the list.

Properties in inner Sydney and inner Melbourne areas have seen the biggest drop in rents.

Rental values in Sydney’s Haymarket suffered the most significant decline nationally, plunging by 7.2 per cent in the three months to June, according to CoreLogic. This was followed by Barangaroo and Melbourne’s Southbank, both seeing rental drops of 7 per cent.

Rents in both the Sydney and Melbourne CBDs dipped by 6.9 per cent.

In Sydney, the median weekly dwelling rent declined by 1.3 per cent to $525 in the three months to June 2020. Weekly unit rents in particular fell by 2.1 per cent in the same period to $525.

Dwelling rents in Melbourne edged down by 1 per cent to $440, with units dropping by 2 per cent to $440 a week.

The median weekly rent across the combined capitals was $460, down 0.7 per cent.

“Investors should note that inner-city unit markets pose a particular risk in the current environment, with rental values likely to fall alongside property values,” Ms Owen wrote in the ANZ-CoreLogic Housing Affordability report.

Gross rental yields are also plummeting in Sydney and Melbourne, where it has fallen by 0.6 per cent and 0.5 per cent respectively in the 12 months to June 2020.

Across the combined capitals, yields have declined by 0.5 per cent in the same period.

How lower levels of rental property supply could hold up rents 

As rents fall amid an uncertain economy and jobs market, investor demand for real estate has dwindled. New investor mortgage activity is at its lowest since January 2019, figures from the Australian Bureau of Statistics (ABS) showed.

The monthly value of investor housing finance commitments dived by 15.6 per cent to $4.2 billion in May 2020. And investor mortgage commitments as a percentage of total housing finance commitments tumbled to 25 per cent in May 2020 from 32 per cent in May 2018.

With less new supply on the rental market, rental market conditions could hold up if the number of investors in the property market remain low.

“Before the onset of the pandemic in Australia, investor participation in the housing market was at its lowest since 2001,” Ms Owen wrote.

“If sustained, this suggests that the decline in demand for rentals could be partially offset by a decline in the supply of rental property.”

Rental listings are already decreasing gradually across the combined capitals. Total rental listings fell by 0.3 per cent when comparing the four weeks to March 15 with the four weeks to June 28, according to CoreLogic. New rent listings dropped by 3.8 per cent when looking at the same periods.

However, in Sydney and Melbourne, supply is on the rise. Melbourne led the hike with rent listings up by 3,730, and Sydney’s listings jumped by 1,043.

It should be noted that the data was released before the new stage four lockdowns in Victoria were announced in early August.

What investors should know in a falling rental market

Many everyday Australians invest in the property market using their life savings to build and retain wealth. Rental market conditions are expected to “directly influence investor demand over the next few years, which could affect both prices and construction”, according to Ms Owen.

But property investors may be less affected during the slump if they:

  • are in the market for the long haul and are ready to hold;
  • have a healthy amount of equity in their property; and
  • have a stable income.

If your tenant has been asking for rent reductions, or if your property is in an area hit by the downturn, you may run the risk of falling into mortgage stress. It may be worth considering refinancing your mortgage to reduce your repayments and improve your cash flow.

But refinancing may not be an option for everyone. If you don’t have enough equity built up in your property, or if you’ve deferred your mortgage, you may not be in a position to refinance. 

Another option is to approach your lender and ask for a rate reduction. Given the generally low interest rates across the board, it’s possible your lender may consider discounting your rate.

Lowest ongoing variable rates on RateCity.com.au

LenderAdvertised rate
Reduce Home Loans

2.19%

Homestar Finance

2.29%

Well Home Loans

2.32%

Mortgage House

2.34%

Tic Toc

2.39%

Source: RateCity.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

What percentage of income should my mortgage repayments be?

As a general rule, mortgage repayments should be less than 30 per cent of your pre-tax income to avoid falling into mortgage stress. When mortgage repayments exceed this amount it becomes hard to budget for other living expenses and your lifestyle quality may be diminished.